Time value of money Flashcards
In order to save, you sacrifice:
Current consumption
What is the risk free rate?
UK Government bond rate
Why is a “dollar today worth more than a dollar in the future”?
Because you can invest it and earn interest
What’s compound vs simple interest?
-Compounded means interest calculated using previous period, simple means interest calculated using original principle amount
How do we get present value from future value?
FV / (1+r)^t
What is future value in terms of present value, when there is more than one period per annum?
FV = PV(1+r/m)^txm
In the FV multiple periods per annum formula, what is t and m?
t = number of years m = number of compound periods per annum
What is FV in terms of PV in the case of continuous compounding?
FV = PV e^txr
What is PV in terms of FV in the case of continuous compounding?
PV = FV e^-txr
What is present value in terms of cash flow?
Cash flow (C) / Discount rate (r)
Present value of perpetuity A is given by :
C/r
Present value of perpetuity B is given by:
C/r * 1 / (1+r) ^ t
What is Annuity?
The difference between when two bond payment schedules start
What is holding period return?
The rate of return that investors obtain over a specific period of time
How do you calculate the simple value of a simple annuity?
C/v x ((1+r)^t - 1)
